New Tech Gets Battered, Sends Nasdaq Whistling Down as Dow Gains

SAN FRANCISCO -- Amid a lot of background noise, and a day ahead of an expected Federal Reserve rate hike, the bottom line is that the trend evident last week re-emerged today. That is, valuations matter.

It would be a gross oversimplification (as well as an increasingly tired trope) to say Old Economy stocks benefited at the expense of New Economy stocks. Still, the Dow Jones Industrial Average rose 85.01, or 0.8%, to 10,680.24 while the Nasdaq Composite Index shed 187.64, or 3.9%, to 4610.49 -- suffering the third-worst point decline in its history.

Major Indices INDEX CHANGE % VALUE YR TO DATE Dow 85.01 +0.8% 10,680.24 -7.1% S&P 500 7.84 -0.5% 1456.63 -0.9% Nasdaq 187.64 -3.9% 4610.49 +13.3% Russell 2000 25.57 -4.5% 549.20 +8.8% TSC Internet 87.78 -6.9% 1184.83 +2.6% NOTE CHANGE PRICE YIELD 10-Year Treasury 4/32 102 9/32 6.187%

The final tallies set up the potential for deliciously cliched headline possibilities for tomorrow's newspapers and tonight's TV broadcasts. But -- as is often the case -- a casual glance does not tell the whole story.

Notably, the Dow's gains were inspired largely by technology components Hewlett-Packard (HWP Quote), Intel (INTC Quote) and IBM (IBM Quote), rather than Old Economy cyclicals or consumer-focused names.

Other Dow movers included AT&T (T Quote) on the upside while ExxonMobil (XOM Quote) was the biggest drag, falling 2.9% as crude prices declined.

Meanwhile, beyond tech bellwethers, the mood in the sector was depressed, if not worse.

A major catalyst for the Nasdaq's retreat was MicroStrategy (MSTR Quote), which tumbled 61% after saying it would restate its financial results for 1999. The Internet software developer said it was changing the way it recognized revenues for certain contracts following guidance by the Securities and Exchange Commission.

Concerns about revenue recognition go beyond MicroStrategy's specific case, but that firm's announcement heightened questions about using price to revenue as the "valuation standard" for Internet stocks, according to Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum.

It's the definition of standards here that [is] very concerning," Hyman said. MicroStrategy's response to the SEC "changes the parameters. I don't look for a major Internet collapse, but we may have to go down somewhat more to wash out weaker ones."

Internet stocks were further saddled by an article in Barron's that questioned the ability of many names in the sector to maintain operations at current cash-burn rates. TheStreet.com Internet Sector index plummeted 87.78, or 6.9%, to 1184.83, although few DOT components were mentioned in the survey, which was contradicted and criticized by many.

Among big Net names in the news, America Online (AOL Quote) added 3.4% after inking a joint venture with PurchasePro (PPRO Quote), which fell 14.9%.

Also, priceline.com (PCLN Quote) fell 14.4% after (another) Barron's article suggested the company could face increasing competition from a proposed online venture by the hotel industry.

Other so-called highfliers in the tech and biotech sectors also got battered today as momentum continued to show its power to move stocks down as well as up.

"It's a potential rout on the Nasdaq," Hyman said. "Clearly the winners are blue-chips because they represent actual earnings."

The strategist noted a "flight to quality" within the tech sector, as evidenced by strong gains from bellwethers such as Intel and Dell (DELL Quote) -- which received positive comments from Salomon Smith Barney. Other notable tech gainers included Micron Technology (MU Quote) and Motorola (MOT Quote). While the Nasdaq 100 shed 4%, the older-tech Morgan Stanley High Tech 35 slid just 1.2%.

Among big losers today were tech names such as Infospace (INSP Quote), Adaptive Broadband (ADAP Quote) and Rambus (RMBS Quote), as well as biotech plays such as Abgenix (ABGX Quote) and Protein Design Labs (PDLI Quote). The American Stock Exchange Biotech Index shed 11.8%.

Few Alarm Bells Ring

Despite the Comp's big decline, most traders took a somewhat relaxed attitude about the session.

"These are the markets we've been in," said Sam Ginzburg, senior managing director of equity trading at Gruntal. "This is what the Comp does. It's not something that's alarming me."

Like many, Ginzburg noted trading volumes were down as many players chose to sit out the action ahead of tomorrow's Fed meeting.

In New York Stock Exchange trading, 917.7 million shares were exchanged while declining stocks led advancers 1,569 to 1,381. In Nasdaq Stock Market action 1.5 billion shares traded while losers led 3,029 to 1,293. New 52-week highs bested new lows 45 to 30 on the Big Board while new lows led 116 to 81 in over-the-counter trading.

"Tech is not going away but it's going to struggle here because it moved so far so fast," said Robert Harrington, co-head of block trading at PaineWebber. "Valuations are still out of whack."

Once the Fed meeting has passed, the focus will return to earnings and growth, the trader said. "Some highfliers will show good growth and revenue and will go up. Some will show things aren't so good" and will continue to suffer.

Finally, Harrington noted the Nasdaq is still struggling on a technical basis after having its "upside momentum" broken last week. Last Thursday's intraday low around 4455 will be a short-term focus for market players, he said.

Among broader market averages, the S&P 500 dipped 7.84, or 0.5%, to 1456.63 while the Russell 2000 dumped 25.57, or 4.5%, to 549.20.

Among other stocks in the news, Lehman Brothers (LEH Quote) fell 4% despite reporting earnings well in excess of expectations. The American Stock Exchange Broker/Dealer Index slid 4%

Among other indices, the Dow Jones Transportation Average fell 24.24, or 0.9%, to 2599.59, the Dow Jones Utility Average slid 1.88, or 0.7%, to 288.05; and the American Stock Exchange Composite Index shed 4.73, or 0.5%, to 1106.27.

For coverage of today's top stocks in the news, see the Company Report, published separately.